1987 (5) TMI 60 - AT - Income Tax

Summary

Issues:
Assessment of interest income from M/s. Cochin Tin Factory for assessment years 1983-84 and 1984-85.

Detailed Analysis:

1. Background and Assessment by ITO:
The appeals were filed against the Appellate Assistant Commissioner's order for the assessment years 1983-84 and 1984-85. The ITO made additions to the assessee's income based on the presumption that interest had accrued to the assessee from M/s. Cochin Tin Factory, as no interest was declared by the assessee for these years. The ITO calculated interest at 15% per annum on the credit balances in the assessee's account and made additions accordingly.

2. Arguments by Assessee's Counsel:
The assessee's counsel argued that the firm M/s. Cochin Tin Factory had financial difficulties, leading to no interest being credited to the assessee's account for the relevant years. The counsel provided evidence of the consistent method of accounting followed by the assessee, where interest income was declared based on credits in the firm's books. The counsel also highlighted the absence of a written agreement regarding interest payments.

3. Arguments by Departmental Representative:
The departmental representative contended that in money-lending cases, the rate of interest is typically determined by the creditor. The representative relied on the orders of the AAC and ITO to support the position that the deposit with M/s. Cochin Tin Factory was interest-bearing from the beginning.

4. Judgment by ITAT:
The ITAT considered the submissions from both sides and emphasized the lack of a written agreement or promissory note regarding the deposit and interest payments. Referring to Supreme Court decisions, the ITAT clarified that for income to accrue, the right to receive it must be vested in the individual. As no interest was credited by the firm for the relevant years, the ITAT concluded that the assessee had not acquired the right to receive the interest income. Therefore, the additions made by the ITO were deemed unjustified, and the appeals were allowed.

5. Conclusion:
The ITAT ruled in favor of the assessee, stating that the interest income from M/s. Cochin Tin Factory for the assessment years 1983-84 and 1984-85 should not be taxed in the assessee's hands due to the absence of credited interest. The consistent method of accounting followed by the assessee, along with the lack of written agreements, led to the decision to delete the additions made by the ITO. The alternate contention to restrict income by adopting a lower interest rate did not hold relevance after the primary issue was resolved in favor of the assessee.